2022 ICT Mentorship Episode 12

Market Structure for Precision Technicians

Introduction to Advanced Price Action Theory

• The lecture focuses on advanced price action theory, specifically tailored for precision technicians.

• Emphasizes that understanding this topic cannot be achieved in a single viewing; it requires multiple exposures and deeper study.

• Aims to go beyond the basic concepts of higher highs and higher lows prevalent in retail market structure.

Application Across Asset Classes

• Uses the Nasdaq March contract for 2022 as an example but notes that the principles apply across various asset classes including Forex, stocks, and bonds.

• Encourages traders to explore different markets while focusing on volatility as a key factor in price movement.

Analyzing Market Movements

• Discusses recent price actions, highlighting runs below previous lows and rebalancing into fair value gaps.

• Expresses skepticism about whether a definitive low has been established, advising against trying to pick tops or bottoms.

Importance of Understanding Market Structure

• Acknowledges that some may find the foundational aspects boring but stresses their importance for long-term success in trading.

• Encourages viewers to engage with historical price data to recognize patterns and confirm or negate price movements.

Developing Trust in Market Analysis

• Addresses common questions from traders regarding selling above old highs and understanding market structure's role in decision-making.

• Stresses that trust must be developed through personal learning experiences rather than simply being taught.

Key Questions Before Trading

• Highlights two critical questions: Is the market likely to move up for buy-side liquidity or down for sell-side liquidity?

Understanding Market Bias and Price Action

The Importance of Market Direction

• The speaker emphasizes the common question about market direction, highlighting the need to understand whether prices will rise or fall.

• Daily price ranges may not always align with bullish or bearish expectations; intraday consolidation can mislead traders into holding onto losing positions.

• Identifying inaccuracies in trading ideas is crucial; being receptive to price clues can prevent losses.

Analyzing Price Structure

• The speaker critiques the use of indicators that obscure price action, referring to them as "lipstick" on charts.

• By analyzing swing highs and lows, traders can make informed predictions about future price movements based on historical data.

Risk Management and Analysis

• Confidence in analysis comes from understanding past price actions rather than making predictions without context.

• When prices approach significant levels (like fair value gaps), it’s essential to monitor for breakdowns or reversals.

Long-Term High Expectations

• A long-term high should remain intact unless proven otherwise by subsequent price action; breaking this level would indicate a flawed analysis.

• Accepting losses as part of trading is vital; they do not reflect a trader's overall capability but are simply costs of doing business.

Recognizing Patterns and Imbalances

• Traders should be cautious of patterns like bull flags, which may signal false breakouts rather than genuine upward momentum.

Understanding Market Structure and Price Action

Intermediate Term Low and Market Behavior

• The discussion begins with the concept of an intermediate term low, characterized by higher short-term lows on either side. This indicates a rebalancing in the market.

• A question arises about identifying breakout directions from patterns like pennants or triangles, reflecting common concerns among developing traders in the early 90s.

• Reference is made to John Murphy's "Technical Analysis of the Financial Markets," highlighting its value for understanding what not to do in trading, as many traders still follow outdated ideas.

Subjectivity in Technical Analysis

• The speaker emphasizes that drawing trend lines is subjective due to multiple swing lows, advocating for a scientific approach rather than mere technical analysis.

• Importance is placed on analyzing price action relationships instead of relying on hypothetical patterns or guesswork.

Identifying Highs and Lows

• An explanation follows regarding how to identify intermediate term highs based on short-term highs, emphasizing their significance in market structure.

• The speaker notes a departure from Larry Williams' teachings while acknowledging his influence on understanding market structure.

Learning from Influential Texts

• Despite owning over 2000 books, only a few are deemed truly useful; nostalgia plays a role in retaining these texts despite their limited practical application.

• The importance of internalizing price structure beyond simplistic high/low categorizations is discussed, critiquing the pursuit of simplicity without seeking deeper truths.

Time Investment and Understanding Price Action

• Younger traders often seek instant gratification but must realize that mastering trading takes more time than anticipated.

• The speaker shares insights into building an understanding of price action derived from foundational concepts taught by Larry Williams.

Higher Time Frame Dynamics

• Discussion shifts to recognizing failed higher highs as potential buying opportunities rather than definitive trend changes, suggesting they may lead back to deep discounts.

• Emphasis is placed on understanding higher time frame structures and their influence on smaller time frames within market dynamics.

Volume Considerations Across Time Frames

Understanding Market Structure

Insights on Market Structure from a Respected Author

• The speaker expresses respect for the author of a particular book but finds only the discussions about market structure to be useful, suggesting that other content may not hold significant value.

• The speaker clarifies that while others attribute their understanding of market structure to Larry Williams, they have developed their own interpretation based on personal study and experience.

Key Concepts in Intermediate Term Highs

• The speaker introduces the concept of an intermediate term high being lower than both short-term highs adjacent to it, emphasizing this as a critical observation in their trading strategy.

• They describe an ideal scenario where an intermediate term high should exceed both short-term highs; however, they note that this is often not the case, indicating potential market behavior.

Analyzing Price Action and Order Blocks

• The discussion shifts to analyzing price action within specific candle formations, particularly focusing on how certain candles indicate potential future movements in price.

• The speaker distinguishes their definition of an order block from common teachings, asserting that traditional definitions do not accurately represent their approach to identifying these blocks in trading.

Anticipating Market Movements

• As green candles form during a bullish run-up, the speaker anticipates a failed price swing and identifies these formations as bearish order blocks for future trades.

• They emphasize using ranges between long-term highs and lows for targeting purposes while hunting for fair value gaps within those ranges.

Utilizing Time Frames for Trading Strategy

• The importance of understanding actual market structure beyond simple higher highs or lower lows is highlighted; the focus is on examining underlying marketplace dynamics.

• A higher time frame premise guides expectations for price movement towards sell-side liquidity after rebalancing at upper levels indicated by previous patterns.

Fractal Patterns and Entry Techniques

• The speaker points out small imbalances within price action that reflect larger fractal patterns observed on hourly charts, reinforcing the idea of repeating structures across different time frames.

• They discuss aggressive entry points based on candle formations while maintaining awareness of existing imbalances that could affect trade outcomes.

Final Thoughts on Trade Execution

• Emphasizing clarity in what one looks for when trading at various time frames helps streamline decision-making processes without overcomplicating analysis with excessive details.

Understanding Market Structure and Trading Strategies

The Importance of Daily Charts

• The speaker emphasizes the significance of the daily chart in trading, stating that institutions and banks base their strategies on it.

• A trader's bias and trend continuation are heavily influenced by the daily chart, making it crucial to focus on its movements over short time frames (1-5 days).

• New traders should limit their forecasts to a five-day horizon to avoid frustration while learning market dynamics.

Analyzing Market Structure Breaks

• A break below any return low indicates a significant change in market structure, which is more complex than simply identifying short-term lows.

• Traders can use high and low ranges for projections, allowing them to set price targets based on previous market movements.

Utilizing Fibonacci Retracement

• The speaker explains how to apply Fibonacci retracement from significant highs and lows to identify potential price targets.

• Emphasis is placed on anchoring Fibonacci levels correctly; the starting point for declines should be at the "enemy term high" where retracements fail.

Algorithmic Trading Insights

• The discussion shifts towards algorithmic trading principles, suggesting that markets operate under certain logical frameworks rather than just buyer-seller dynamics.

• If algorithms dictate market movements, they must follow specific logic regarding price fluctuations without being able to see individual stop-loss orders.

Learning Market Structure Gradually

• The speaker acknowledges that understanding these concepts may feel overwhelming but encourages learners to take their time with gradual study.

Understanding Market Structure and Order Blocks in Trading

The Role of Fair Value Gaps

• In a series of up-close candles, the formation of a fair value gap indicates potential market movement without needing to break a swing low.

Market Structure Shifts

• A market structure shift occurs when the short-term low is broken, allowing traders to anticipate price movements into imbalances for potential short or long positions.

Identifying Weakness in Market Trends

• If an enemy term high does not exceed two short-term highs, it signals market weakness, indicating that algorithms may be revealing their strategies.

Smart Money Trading Insights

• Smart money traders focus on imbalances and liquidity rather than traditional charting methods like support/resistance or moving averages.

Application Across Markets

• The principles discussed apply universally across markets, including Forex, emphasizing the importance of understanding price action over conventional indicators.

Aggressive Entry Strategies

• An aggressive entry can be made without breaking a swing low by recognizing extreme weakness in market structure and anticipating future short-term highs based on candle analysis.

Advanced Order Block Interpretation

• Recognizing order blocks involves identifying imbalances within them; this advanced interpretation allows traders to predict sell-offs effectively.

Classifying Highs and Lows

• Intermediate term highs should not exceed previous highs; if they do, it suggests flawed trade ideas. Proper classification helps maintain alignment with bearish expectations.

Importance of Rebalancing

• An enemy term high is characterized by lower short-term highs on both sides; rebalancing plays a crucial role in determining future price movements.

Risk Management Techniques

• To avoid account blowouts, traders should wait for market structures to align with their expectations before entering trades.

Utilizing Lower Time Frames

• Observing lower time frames can provide insights into order blocks during upward movements; this aids in making informed trading decisions based on recent price action.

Classic Short Entry Strategy

• A classic low-risk entry involves returning to an order block after a gap; placing stops above the last candle's high ensures better risk management.

Final Thoughts on Order Block Theory

Understanding Market Structure and Imbalances

Analyzing Candlestick Patterns in Bearish Markets

• The discussion begins with the identification of up-close candles within a larger order block, emphasizing their significance in a bearish market structure.

• The speaker encourages viewers to analyze historical data to build confidence in recognizing these patterns, highlighting the importance of hindsight for understanding market behavior.

• A specific focus is placed on the hourly order block as a target for limit orders, indicating where traders should aim when entering trades.

Risk Management and Trade Execution

• The risk associated with entering trades at the bottom of an hourly bearish order block is discussed, noting that drawdown is limited to the movement of one candle.

• Transitioning to a four-minute chart reveals how market movements align with previous analysis, stressing that precision may vary due to market volatility.

Navigating Market Imperfections

• The speaker acknowledges that markets do not always behave perfectly; minor deviations from expected levels are normal and should be anticipated by traders.

• Emphasizing experience, it’s noted that just because prices exceed certain levels does not mean they will continue rising indefinitely.

Advanced Entry Techniques

• Viewers are taught to recognize entry patterns based on market structure and imbalances, particularly focusing on how rebalancing affects price action.

• When observing bullish candles during bearish trends, it's crucial that prices do not surpass previous highs established by up-close candles.

Institutional Order Flow Insights

• The concept of institutional order flow is introduced; when bearish, up-close candles should prevent prices from exceeding them.

• Observations about price behavior around key resistance levels highlight how unbroken up-close candles act as barriers against upward movement.

Key Takeaways on Market Dynamics

• A summary emphasizes breaking down price swings into identifiable imbalances while maintaining awareness of key highs and lows that guide trading decisions.

Understanding Market Structure and Order Flow

Key Concepts of Market Movement

• When analyzing price movements, observe the color of candles; predominantly green candles indicate bullish trends, while down closed candles should act as support if prices retrace.

• Down closed candles serve as a support structure for order blocks, essential for understanding market dynamics and institutional order flow.

Identifying Trade Validity

• If an intermediate high or low is broken after establishing a trade idea, it may signal that the analysis is flawed. Traders should reassess their positions and wait for new setups.

• Institutional order flow indicates that during bullish swings, there are fewer down closed candles; these should provide support if prices return to them without overlapping.

Analyzing Price Swings

• In bullish price swings, down close candles act as support; conversely, in bearish swings, up close candles represent resistance.

• The integration of these concepts offers unique insights into price behavior not typically covered by other educators or traders.

Learning from Experience

• Understanding swing highs and lows requires deeper thought and study; it's not something easily conveyed in simple statements.

• New traders may struggle to reach conclusions independently due to lack of experience; ongoing education is crucial for grasping complex market behaviors.

Importance of Higher Time Frames

• Observing how markets rebalance can help classify significant highs and lows. This understanding aids in predicting future price movements based on higher time frame charts like daily charts.

• Trading against the trend indicated by higher time frames increases risk. Aligning trades with daily chart trends minimizes potential losses.

Navigating Market Trends

• Avoid making trades that go against prevailing trends unless there's a strong rationale; this approach reduces the likelihood of failure.

• While losing trades are inevitable, aligning with higher time frame analysis helps avoid common mistakes made by retail traders.

Recognizing Market Traps

• Small intraday moves can create false signals leading traders to believe reversals are imminent when they are merely traps set by larger market forces.

• It's vital to remain aware of what the daily chart suggests before entering trades; understanding market context prevents unnecessary losses.

Current Market Analysis

Market Analysis and Trading Decisions

Current Market Sentiment

• The speaker expresses a neutral stance on trading, indicating uncertainty in the market due to global events.

• Acknowledges confusion in the marketplace, stating that money is "running scared" and he cannot predict future movements with certainty.

Analyzing Market Conditions

• Discusses potential scenarios for market movement, including possible reversals or continued declines but emphasizes his current inability to classify these conditions definitively.

• Highlights the importance of being able to frame both bullish and bearish perspectives when analyzing charts; if one side is easier to justify than the other, it indicates higher probability.

Lessons from Trading Experience

• Reflects on personal trading experiences where indecision led to losses, emphasizing that many traders have faced similar regrets after making impulsive decisions.

• Shares past reckless behavior in trading during the 1990s as a learning experience about respecting risk.

Teaching Approach and Community Engagement

• Encourages questions from his mentorship group, noting that understanding complex concepts takes time and cannot be grasped in a single lesson.

• Addresses comments from viewers, clarifying that while he values feedback, not all questions can be answered immediately; some will be addressed through ongoing lessons.

Technical Insights into Market Structure

• Emphasizes the technical nature of market structure analysis and critiques others who may misrepresent their knowledge of it.

• Points out significant price movements based on his teachings as evidence of their validity; encourages viewers to trust their own observations rather than blind faith.

Current Trading Stance

Trading Insights and Market Structure Analysis

Current Trading Stance

• The speaker is currently not engaging in any trading activities, including forex, futures, crypto, stocks, or bonds. They plan to observe the market for the remainder of February without participation.

• A recent price move was logical and precise, aligning with prior expectations shared with the audience.

Teaching Methodology

• The speaker introduced new concepts regarding market structure for the first time, which may leave some students confused due to gaps in their understanding.

• A top-down approach is utilized for framing setups, focusing on higher time frames while analyzing lower ones. The hourly chart serves as a critical reference point.

Market Dynamics

• The market's rapid downward movement creates an expectation of a return to previous levels for rebalancing purposes. This behavior is attributed to one-sided price action.

• Buyers are given opportunities at certain price points despite potential inaccuracies in their assumptions about market direction.

Understanding Market Logic

• The speaker challenges traditional trading methodologies (like trend lines and patterns), questioning how markets determine which discipline to follow on any given day.

• Various trading disciplines often conflict with each other; this inconsistency raises questions about their validity in predicting market movements.

Core Principles of Market Behavior

• The speaker emphasizes that markets operate based on liquidity principles rather than relying on harmonic patterns or other technical indicators.

• Price movements are driven by liquidity needs—either seeking buy stops above highs or sell stops below lows—rather than adherence to specific trading strategies.

Critical Reflection on Trading Practices

• There’s a call for traders to critically evaluate their beliefs about market behavior and recognize the fallacies within conventional trading practices.

• Despite having significant financial success from trading, the speaker chooses to teach freely out of passion rather than necessity.